Yield Curve Flattens as Fed Officials Say June Hike is Possible

By Amey Stone

The yield curve flattened Tuesday following speeches by two important Federal Reserve officials who indicated — despite market skepticism — that the Federal Open Market Committee could raise rates as soon as its mid-June meeting. Inflation data that was just slightly better than expected also boosted rate hike chances.

Atlanta Fed President Dennis Lockhart and San Francisco Fed President John Williams, appearing together at a lunch, both said that the economy is healthy and June should still be on the table for a rate hike.

The two-year Treasury note, which most closely tracks Fed moves, rose nearly 3 basis points in the afternoon to .82%. The 10-year Treasury rose just 1 basis point after their comments.

It’s pretty clear most market participants don’t actually expect the Fed to tighten in June. But investors think it’s more likely they will hike rates later this year.

Ian Lyngen of CRT Capital Group explained the dynamic well in his closing note to clients:

Our takeaway remains simply that the current level of inflation and the near-term outlook are not enough to prevent the FOMC from tightening later this year, but are not a cause themselves. Tuesday saw the probability of a June rate hike (as seen by BBG’s WIRP) improve to 8% from 4% earlier this week. Doubling, sure – but off of very low levels. A June meeting is still effectively off the table, although those few still seeing it as possible were able to take solace in the CPI release.

Amey Stone is Barron’s Income Investing blogger and Current Yield columnist. She was formerly a managing editor at CBS MoneyWatch, MSN Money and AOL DailyFinance. Her responsibilities included overseeing market coverage and personal finance topics. Prior to those roles, she was a senior writer at BusinessWeek where she authored the Street Wise column online and contributed to the magazine’s Inside Wall Street column. Topics covered included economics, corporate finance, Fed policy, municipal bonds, mutual funds and dividend investing. She co-authored King of Capital, a biography of Citigroup Chairman Sandy Weill. She is a graduate of Yale University and Columbia University’s Graduate School of Journalism.